Thursday, May 10, 2018

Malaysia holds rate, economic prospects remain strong

Malaysia's central bank left its benchmark Overnight Policy Rate (OPR) at 3.25 percent, as expected, saying it expects underlying inflation to remain moderate amid stable demand conditions while the trajectory of headline inflation will depend on oil prices, which remain highly uncertain.
Bank Negara Malaysia (BNM), which raised its rate in January for the first time since July 2014, added that a stronger exchange rate of the ringgit as compared with last year would help dampen any rise in the cost of imports on the backdrop of continued strength in the global economy.
"Overall, the prospects for the Malaysian economy remain strong," the central bank said, with private sector activity expanding and exports rising.
Despite recent volatile in financial markets, BNM said domestic markets had remained resilient as monetary and financial conditions are supportive of economic growth in the post-election environment while the financial sector is strong and the economic outlook remains positive.
Malaysia's headline inflation rate eased to 1.3 percent in March from 1.4 percent in February while core inflation dropped to 1.7 percent from 1.8 percent.
The economy grew by an annual rate of 5.9 percent in the fourth quarter of last year, down from 6.2 percent in the third quarter while the exchange rate of the ringgit has been easing this month against the rising U.S. dollar after rising steadily through 2017.
The ringgit was trading at 3.95 to the dollar today, up 2.5 percent this year.
The International Monetary Fund has estimated 2017 growth in Malaysia of 5.8 percent but then easing to 5.3 percent this year. Headline inflation is forecast to decline to 3.2 percent this year from 3.8 percent in 2017.
Earlier today uncertainty began surrounding Malaysia's political future as the ceremonial king delayed the swearing in ceremony of Mahathir Mohamad, the 92-year-old former prime minister, whose coalition this week won the parliamentary elections over of Prime Minister Najib Razak.

The global economy continues to gain strength with growth being more broad based and synchronised across regions. Global trade sustained its strong momentum. In the advanced economies, higher wages and diminishing labour market slack remain supportive of growth. Additional policy support, particularly in the US, is expected to lift growth further. In Asia, growth will be driven by sustained domestic activity and strong external demand. Financial markets continue to face intermittent volatility amid rising trade tensions. Global growth prospects remain balanced although there are risks should trade and geopolitical tensions worsen.

For the Malaysian economy, latest indicators point towards continued expansion in private sector activity and exports. Going forward, the positive growth momentum is expected to be sustained, driven by the strength in both domestic and external demand. Private consumption will be supported by favourable income and labour market conditions. Investment activity is projected to be sustained by implementation of ongoing infrastructure projects and capacity expansion by firms. On the external front, exports are expected to continue benefitting from the positive momentum in global growth and trade in advanced and regional economies. Overall, the prospects for the Malaysian economy remain strong.

Headline inflation is expected to remain moderate for the year as a whole on expectations of a smaller effect from global cost factors. A stronger ringgit exchange rate compared to 2017 will mitigate import costs. However, the trajectory of headline inflation will be dependent on future global oil prices which remain highly uncertain. Underlying inflation, as measured by core inflation, is projected to remain moderate amid stable demand conditions.

Despite financial market volatility due to external developments, domestic financial markets have remained resilient. Malaysia’s economic fundamentals are strongly anchored. The domestic economic outlook remains positive, the financial sector is strong and monetary and financial conditions are supportive of economic growth in the post-election environment.

At the current level of the OPR, the degree of monetary accommodativeness is consistent with the policy stance to ensure that the domestic economy continues on a steady growth path amid lower inflation. The MPC will continue to monitor and assess the balance of risks surrounding the outlook for domestic growth and inflation."